What it takes to make money with $50 a barrel oil

How can oil and gas companies make money with crude prices at $50 a barrel? Through a combination of luck, foresight and risk-taking, according to a new study by the research firm IHS Markit.

The study, which focused on the Delaware Basin in West Texas, found that the successful drillers shared common characteristics. They all filed early claims to mineral rights, bought land when it was still cheap, and hired geologists who knew local formations and could help identify the most productive reserves.

They also took the risk of using horizontal drilling before it became an industry standard. Unlike conventional drilling, which bores straight into the ground, horizontal wells cut across shale formations, changing direction to follow oil and gas deposits. While more expensive to drill, a single horizontal well can match the production of multiple vertical wells.

This technology and timing made a major difference for oil producers in the Delaware, said Sven Del Pozzo, director of energy company and transaction research at IHS. As a result, companies there earned a pre-tax rate of return of about 16 percent rate, about twice what IHS expected to see.

"They just execute their business and are prepared to do it in any commodity environment," said Del Pozzo.

The Delaware Basin is a sub-section of the larger Permian Basin, which has become the center of drilling activity as oil prices have slowly risen in recent months, from a low of about $26 a barrel to around $50. Crude settled in New York Friday at $49.81 a barrel.

Oil reserves tend to be more accessible in the Permian, which means that drillers can make money at lower prices than in other shale formations, such as the Eagle Ford in South Texas or the Bakken in North Dakota, analysts said. The Permian's geology not only makes for easier drilling, but the network of pipelines there makes it cheaper to move oil and influx of workers from lagging oil fields has kept labor costs reasonable

That has allowed drillers profit even though prices are still less than half the 2014 peak of more than $100.

Wells in the Delaware Basin are deeper, and harder to drill that other parts of the Permian, but they are also bigger and more productive, something that sets the area apart. As late as 2014, it wasn't profitable to drill in the Delaware, but advances in horizontal drilling and hydraulic fracturing, as well as better knowledge of the locations of oil reserves have turned that around.

Ben Shattuck, an analyst at the energy research firm Wood Mackenzie,, estimated that drillers can break even at about $37 a barrel in the Delaware because of the oilfield's extraordinary productivity.

Shattuck said getting into an oil field early and gaining experience there can go a long way toward being able to drill profitably. The earliest companies into an oilfield can acquire mineral rights and leases at lower prices. As more drillers come in, it increases competition for land and raises leasing costs, cutting into profits. Longtime, established operators have historically done well in the Permian, Shattuck said.

"It was the incumbent operators that really outperformed any kind of new entrant," he said. "It's just a function of the industry having more experience."

Ryan Maye Handy covers the regulation of utilities and oil and gas in Texas. She follows the Railroad Commission of Texas, the state’s oil and gas regulator, and the Public Utility Commission, and tracks trends in renewable energy growth across the state. She came to the Houston Chronicle in October 2016 from Colorado, where she worked as a reporter for nearly six years covering energy and the environment, county government and natural disaster recovery.